Contract law is made up of a variety of regulations and laws enacted to enforce promises made under certain conditions. A contract is a legally binding agreement which enforces the obligations of each party, requiring them to honour any promises made to another party or parties under certain conditions. Contracts are entered into every day by individuals and businesses alike. A legally binding contract can be as simple as a transaction carried out by purchasing a loaf of bread from a convenience store, or as complex as a million dollar, hundred page credit agreement made between two businesses.
How are contracts formed?
Agreement – The first step towards establishing a valid contract is an agreement of some sort, usually consisting of an offer made by one party which is accepted by another party or parties. To be legally binding, the contract must be based on an agreement which is not ambiguous, vague, or incomplete. All parties involved must reach consensus on the agreement.
Consideration – This consists of the price or cost requested by and paid to whichever party has made the offer, in exchange for them performing what was offered. Consideration in this form is required for a contract to be legally binding.Intention to create legal relations – All parties to the contract must possess the intention to enter into a legal relationship through that contract. Consideration (price/payment) is usually evidence enough of this intention, though not always. This intention can be detailed in the terms of the contract.
Capacity – Under law, some persons do not have the ability to enter into enforceable contracts. In this case, the ability to enter a contract or not is known as ‘capacity’, which is based on perceived vulnerability to exploitation. Minors and people affected by psychoactive substances such as alcohol, for example, do not have the legal capacity to enter a legally binding contract (with some exceptions, usually for simple contracts such as minor transactions).
Formalities – Some types of contracts are subject to certain formalities. For example, a contract for the sale of a house must be issued in writing in order to be legally binding.